China-Zambia Relations Strengthen

During Zambian President Rupia Banda's latest ten-day state visit to China, the President was able to secure a US$1-billion loan facility from Chinese authorities.

IHS Global Insight Perspective

Significance: The expansion in mining sector capacity during 2009 was able to shield the Zambia economy against global economic turmoil.

Implication: Increased investment by China in Zambia's copper industry and financial support in infrastructural development will increase the country's medium to long term growth potential. Biggest risks include weak labour practices, limited government revenue flows due to tax concessions and weak economic links.

Outlook: IHS Global Insight expects GDP growth to remain within the 5%-6% range in the medium term.

More detail over Chinese-Zambian relations emerged after Zambian President Rupia Banda's ten-day state visit to its major Eastern partner during February 2010. According to Zambian President Banda the government secured a US$1-billion loan facility from China at highly concessionary rates. The money will be channelled towards crucial infrastructural programs, with little detail revealed over the priority of these programs. In the past Chinese investment in infrastructural projects have played a major role in the country's economic development and included projects such as the Tanzania Zambia Railway (TAZRA), the Chambishi Multi Facility Economic Zone and the rehabilitation of the Kafue Gorge hydro electrical plant. During his state visit to China, the two countries also signed a mining agreement and a deal to set up a joint economic zone in Zambia. China will also be involved in the construction of a National Stadium in Lusaka for the period beginning March 2010 to February 2015.

Chinese finance to the Sub-Saharan African region has been highly concentrated in the past, with World Bank estimates suggesting that 70% of all Sub-Saharan African financing being channelled to just four countries: Nigeria, Angola, Sudan and Ethiopia. Petroleum imports accounts for the largest percentage of trade between Sub-Saharan Africa and China (at 80%), followed by timber and minerals. "As a result, China now depends on Africa for around 30% of its oil imports, 80% of its cobalt imports and 40% of its manganese imports," the World Bank reports. Angola is by far China's biggest trading partner in the Sub-Saharan African region followed by Republic of Congo, Equatorial Guinea, Sudan and South Africa.

China's investment in Zambia exceeded US$1 billion in December 2009, creating around 15,000 job opportunities. According to the Zambian Development Agency Zambia's mining industry reaped the biggest benefit from Chinese investment, while other sectors such as manufacturing (Chambishi Copper Smelter), construction (infrastructure, road rehabilitation), tourism (hotels) and agricultural also received sizeable allocations. The Jinchuan Mining group and China Non-ferrous Metals Mining Company acquired two of Zambia's strategic mining companies during 2009 at the height of the international financial turmoil and collapsing commodity prices. The Jinchuan Mining Group acquired 51% majority shares in Zambia's only nickel mine, Albidon Mining Company after the original owners pulled out due to weakening international metal prices. Jinchuan initially injected US$7 million as part of a financial restructuring of the mine. China Non-ferrous Metals Mining Company (CNFC) acquired Luanshya Copper Mine (LCM) for US$50 million during 2009. CNFC is planning to invest a further US$400 million in the country's mining sector. Observers argued that Chinese investors were able to operate mines during the downturn as investments were backed and guaranteed by their sponsoring government. The Zambia Development Agency further reports that the recent signing of an Investment Promotion and Protection Agreement (IPPA) with a Chinese private mining company - Zhougui Mining Group - will attract US$5 billion investment towards the copper mining and other minerals in the North Western and Copperbelt provinces of the country in the future. The successful completion of the project will rank it amongst one of the largest investments by private foreign company into the country.

Implications and Outlook

Zambia has been one of the few economies within the Southern African region that was able to sustain production of its key exporting commodity, namely copper, during 2009. Overall copper production increased by 14.0% y/y during 2009 to 697,859 tonnes from 611,940 tonnes in 2008. Reserve Bank of Zambia data show that total exports of the commodity totaled 675,385 tonnes over January-December 2009 from 587,125 tonnes for the same period in 2008. The commencement of new mining operations such as the Lumwana Copper Mine, owned by Equinox Minerals, boosted copper production during 2009.

Rising investment in the copper industry, boosted by Chinese involvement, will continue to support output in the sector in the near term. This will not, however, come without some resistance from local consumers and businesses. Chinese operators are notoriously being blame for poor working conditions and low-paid wages, exaggerated by Zambia's weak legal system that is unable to protect vulnerable workers. Many IPPA agreements or businesses set up in economic zones grants significant tax concessions that leave the benefits to government revenue flows and ultimately the general population limited. The large projects could also result in enclaves with weak economic links to other sectors. Growth rates could therefore be high, but could result in greater income disparities.

Over the short to medium term rising investment in the copper mining sector will, however, boost Zambia's overall GDP growth rate, with IHS Global Insight's projections pointing to a medium term growth rate of 5%-6%. Infrastructural development, secured through the Chinese loan facility, also remain a crucial condition to enhance potential output in the economy. Fiscal discipline, sustainable export revenue flows and high growth is expected to support Zambia's external debt fundamentals and IHS Global Insight maintains its B+ Sovereign Risk Rating.